A piggyback loan is when a borrower uses two mortgage loans simultaneously to buy a home, one “piggybacking” off of the other. The second mortgage can be in the form of a home equity loan or home equity line of credit (HELOC), while the first is your primary mortgage.

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If you are considering a second mortgage, there are several pros and cons that you must take into account before applying. Piggyback mortgages can help you:

  • ·        Avoid paying private mortgage insurance (PMI)
  • ·        Pay fewer taxes (second mortgages are tax-deductible)
  • ·        Avoid going over the conforming loan limit
  • ·        Buy your next home before you sell your first

80/10/10 and 75/15/10 are the most common piggyback loan structures.

Avoid paying private mortgage insurance

One of the reasons a borrower may want a piggyback mortgage is to pay a low down payment without paying private mortgage insurance (PMI.) Typically when paying less than 20% down on a home, private mortgage insurance is applied to monthly payments by the lender. If the borrower can only afford a 10% down payment, the remaining 90% would require PMI. With a piggyback loan using the 80/10/10 structure, their payments break down as follows:

  • The first mortgage finances 80% of the home
  • The second mortgage finances 10% of the home
  • The remaining down payment required would be 10%

Second mortgages via piggybacks are tax-deductible

When you get a second loan via a piggyback, that loan’s interest is tax-deductible, which is a great way to lower your taxable income. Tax deductions are incentives for homeowners, and if you have a HELOC, those funds must be used towards the home.

Avoid going over the conforming loan limit

A piggyback mortgage is an alternative to a jumbo loan and going over the conforming loan limit. The home is purchased with the first loan being within conforming loan limits, and the smaller second loan doesn’t apply towards that limit. These loans may come with better rates than a jumbo.

Piggybacks via referral

It is possible to piggyback loans from two different lenders. For example, SmartMortgage does not offer home equity lines of credit at this time. Instead, we will provide you with your first loan and then refer you to another lender for the HELOC that closes simultaneously together.

These strategies are more advanced than your average mortgage, but well worth it if you find yourself in one of these situations. Your loan officer will work with you to explore your options, and help guide you to the mortgage structure that best meets your needs.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.